US Markets

Bull market lives on but it's rather 'old in the tooth,' says Dennis Gartman

Volatility shouldn’t be a measure of bearishness or bullishness: Gartman

The eight-year bull market in U.S. equities lives on but is getting "rather old in the tooth," according to investor Dennis Gartman, who has warned about how quick a fall could be once it comes.

The editor and publisher of Gartman Letter observed that years spent on the trading floor has taught him that, "stuff goes down a whole lot faster than stuff goes up."

Explaining on CNBC Wednesday why this week's spike in the VIX index (measure of equity market volatility) didn't precipitate a fall in major U.S. equity markets, Gartman noted that the assumption that volatility only measured downside risk was flawed and that markets were beginning to acknowledge that.

"What we're seeing now is the VIX beginning to understand you can have volatility in both directions," he said, clarifying that the VIX is not a measure of bearishness or bullishness but volatility.

"There are geopolitical circumstances out there that are very disturbing … And I think the market wants to price that in," he added, referring to the VIX's 17 percent move higher in the first two trading days of this week.

Hopes for banks to earn superior returns are being dashed: Gartman

U.S. equity market participants are very focused this week on the first-quarter earnings reports of major banks, many of which will be rolled out over Wednesday and Thursday. Following last quarter's bumper set of results for many of the financial institutions and a strong performance for U.S. financials since the election of President Donald Trump last November (despite a slight pullback in the past month), expectations among many investors are high for another robust set of results.

Gartman, however, says he cannot share the wild optimism.

"Everybody wants to continue to believe that JPMorgan will surprise us again as demonstrably again as they surprised us with their previous quarter's earnings and I think that the chances of that happening are slim to none," he soberly opined.

The yield curve has flattened: Gartman

Gartman pointed out that recently banks have been dealt the opposite card to what they need – above all, a flattening yield curve with longer-term rates falling and shorter-end rates rising rather than a steepening curve which allows them to secure margin pick-up.

"These are all things which work to the detriment not to the benefit of the banking system and I think the chance of a surprise for any of the major banks is minimal at best," Gartman added.
The long-term trader also highlighted that the purpose of banks is to lend to businesses – an activity seemingly stuck in a rut, according to the latest disappointing data from February on U.S. loan growth.

"Business lending is almost negative, it's barely, barely higher and that's a real problem for the banks," he said, adding, "loan growth is very minimal at best and I think that has to weigh upon prices."

All told, Gartman's outlook for financials lacks optimism.

Juan Manuel Serrano Arce | Getty Images

"Life in a flat yield curve, life in an inverted yield curve is awful. Life in an increasingly positively sloped yield curve is much more pleasant - let us hope that that happens. I think the odds of that happening are relatively minimal, however," he concluded.
Not everyone shares the trader's pessimism, however, with analysts from Jefferies in a recent research piece acknowledging the difficulties ahead for banks but articulating more bright spots.

"While turbulence in D.C. policy-making has taken a bite out of the post-election bank rally, investor sentiment is still relatively positive with another rate hike in the books and more likely on the way. Loan growth is the first quarter soft spot and biggest forward wildcard, but we believe full-year loan growth guides should remain intact for now on hopes for a better second half," said the research.

The analysts were also keen to emphasize the challenges ahead were more likely to weigh on smaller and mid-tier banks rather than the largest, global institutions.

"While sluggish loan growth in the first quarter is likely to impact the majority of banks to some extent, large-cap banks could benefit from offsets such as stronger investment banking fees and trading revenues. Mortgage production is expected to decline significantly versus the fourth quarter but servicing should be stronger - which also tends to help the larger banks," the note added.

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